Large Russian companies are moving some of their cash holdings to Asian banks as the latest sanctions from the US and the EU have raised fears that Russia could eventually be completely shut out of US dollar funding markets.
Megafon, the country's second-largest mobile phone operator, said on Thursday that it had converted 40 per cent of its cash reserves into Hong Kong dollars at Chinese banks, with the remaining 60 per cent being held in roubles.
Sources close to Norilsk Nickel and Novatek said the nickel producer and Russia's second-largest natural gas producer had also started moving some of their foreign exchange holdings out of the dollar.
"We are getting a lot of requests now to help customers move into Hong Kong dollar," said a senior banking working on trade finance and cash management at a large western bank in Moscow. "First it was mainly from US dollar to euro, and now it is increasingly to the Hong Kong dollar."
Analysts and bankers said the moves reflected heightened worries among the country's oligarchs over escalating sanctions. "It is quite surprising that Megafon, a domestically focused company, chooses to place such a large chunk in Hong Kong dollars. It means that they are looking at the worst-case scenario," said Charlie Robertson, global chief economist at Renaissance Capital. "Such an 'Iran-style' scenario is quite unlikely, but there is a sense of concern over it."
From Friday, a number of major Russian state banks and development banks are barred from selling new bonds or equity with a maturity longer than 90 days to EU nationals and companies, under sanctions that expand partial restrictions from US capital markets to European ones.
Megafon is controlled by Alisher Usmanov, Russia's richest man who has ties to the Kremlin. Vladimir Potanin and Oleg Deripaska hold stakes in Norilsk Nickel. All three oligarchs as well as their companies have so far escaped sanctions.
Novatek, while not a target of EU sanctions, falls under the US capital market restrictions announced last week, and its billionaire shareholder Gennady Timchenko, who is close to president Vladimir Putin, was one of the first oligarchs targeted by US visa bans and asset freezes against Russia in the Ukraine crisis.
Megafon said it had decided to move 40 per cent of its cash into Hong Kong dollars and to Chinese banks because Hong Kong's currency was "an effective proxy for the US dollar even in times of market disturbances" and because having Hong Kong dollars "at hand" in a Chinese bank made settlements easier with Huawei, the telecom equipment provider that won a large contract from the company last month.
Russian executives and bankers said Chinese banks were most likely to benefit from heightened fears about a complete dollar transaction ban because they were regarded as the least likely to comply with western sanctions.
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According to two bankers, some Russian companies are seeking to shield their cash holdings from potentially more drastic sanctions by setting up structures under which they could deal in dollars between different accounts in the same bank. Western bankers said their institutions were refusing all such requests from customers but assumed that some Chinese banks were accepting them.
Companies' preparations for a feared US dollar transaction ban adds to earlier interest in transferring cash to Asian currencies and jurisdictions. Following the financial crisis in Cyprus, where a large part of Russian offshore funds are held, many Russian holdings have started to look into opening accounts in Hong Kong and Singapore. Plans by the Russian government to regulate offshore structures more tightly and enforce taxation have had the same effect.